The coming worldwide credit crunch

TJ222

Is it possible for you to answer the question that Eva2008 posed i.e.

"Was just wondering....what happens to our properties in Spain that are still mortgaged if the Spanish economy goes bust, or goes back to Pesetas, or if the particular bank that we have a mortgage with goes bust?

What happens if the Euro disintegrates?"

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There are lots of different questions here. If the Spanish economy goes bust, it will probably be the same as, what if the Euro disintegrates. The ECB have stretched both the will and the ability of the European Union to the max with Greece and Portugal and Ireland. There is little if any goodwill for anymore and anyway Spain's economy is too large to be bailed out.

If  your bank goes bust, its assets will be taken over by someone else, possibly the state as was the case in the UK, or by another bigger bank, such as happened in the US. In this case you will notice little difference.

Imho the question that needs to be answered is when the Euro fails, not if, what will happen then. The Telegraph tried to answer this question a few days ago with respect to Greece.

http://blogs.telegraph.co.uk/finance/andrewlilico/100010332/what-happens-when-greece-defaults/

I imagine the same applies to Spain. The extra complication with Spain would likely be the end of the Euro, whereas with Greece the Euro would probably manage without them. The Telegraph seems to infer that once someone goes all the periphery countries would follow suit, I am not so sure about this.

What any exit would do is cause a domino effect of destruction thru the banks of all the Euro nations, as one bank defaulted and caused a chain reaction as bad debts got passed on. The reason they are tipping good money after bad with Greece is because of the fear of this very effect. Spain would be different in that it would significantly up the ante.

Even if the problems of one country can be pushed down the road a bit with more debts added to already unpayable debts, it does not tackle the fundamental problem of the Euro, which is that it is forceing together economies that are simply too diverse. It is clear now that the entry requirements were fudged and there was a lot of looking the other way with regard to the periphery nations and also in teh case of Greece some down right fraud with the help of Goldman.

Anyway to get to the question, provided that your loan is in Euros from a Spanish bank, I guess it would get converted to the new currency. The problem with that would be that as huge devaluation takes place, you would find your cost of anything imported would go thru the roof. Since Spain like the UK produces very little, I think there would be massive inflation and massive unemployment. The end result would likely be that most people would be forced to default on their loans, since the price they paid for their homes and hence their mortgages would be totally out of line with the new economy. If you have earnings in Sterling, then things would be different of course.

With time I think it would be good for Spain, but it would involve alot of pain in the near term as people were forced to accept their new much much lower standard of living. Spain is big enough to cause a worldwide banking crisis and with it another worldwide depression, so its certainly debatable if this would be allowed to happen. The problem is that the alternative, ie keeping all these bankrupt countries going is going to lead to hyperinflation down the road, as the funds get printed.

In short there is no painless solution to this problem, and one thing is for sure, like alot of things in life, the longer you put it off the worse the eventual mess will be.

Not sure if this is any help to you?

Thanks TJ222......... and your advice for anyone considering investing in Spanish property or considering taking on a Spanish Bank mortgage right now is???  (or re-investing for that matter, as with the case of doing "deals" with the Spanish Banks by those who have claims against them).

 Thanks TJ222......... and your advice for anyone considering investing in Spanish property or considering taking on a Spanish Bank mortgage right now is???  (or re-investing for that matter, as with the case of doing "deals" with the Spanish Banks by those who have claims against them).

Erhhh - go get your head examined! 

I'm not suggesting this I hasten to add!

Thanks TJ222.

Looks like the Castilla La Mancha region is bankrupt and can't afford to pay the salaries of its 70,000 workers.  I wonder how many other regions and town halls are in a similar position.  Manilva town hall where I live has a massive Social Security and Tax bill (25 million euros last I heard), and apparently a lot of suppliers have not been paid.

www.eyeonspain.com/blogs/SpanishBusinessNews/5658/spain%E2%80%99s-castilla-la-mancha-region-can%E2%80%99t-pay-salaries-mundo-says.aspx

 It always make me grimace when you find out that the Socialist where the worst crooks of all. When are people going to learn that Socialism always ends the same way, running out of other people's money and then bankruptcy.

The guys elected on the promise of sharing the wealth end up distributing poverty to paractically everyone.

You see the demonstrations in Greece and Spain and you wonder what it is they want. No one was complaining when the "free" money was being spent, but with no productive industry and no hope of ever paying it back. Now its run out and there is no more in sight. What do the people expect.

Lets just hope that the whole sorry story of the Euro collapses before there is any more violence.

Yes, TJ.

You say:

"You see the demonstrations in Greece and Spain and you wonder what it is they want. No one was complaining when the "free" money was being spent, but with no productive industry and no hope of ever paying it back. Now its run out and there is no more in sight. What do the people expect."

This highlights the "bread and circuses" point I was making in another post.

Patricia

From the Mail.

The IMF yesterday approved an emergency £10billion payment to the Greek government to enable it to pay its bills next month.

Read more: http://www.dailymail.co.uk/news/article-2004549/Let-Greece-default-debts-demand-Tories-EU-bailout-set-hit-1trillion.html#ixzz1PXFTpAYe

Over to you TJ!!

 Kenny

I have thought about writing here on Greece, but its hard to know what to say. Its a slow motion train wreck that cannot be stopped, only made worse by further bailouts. The problem is clear that its not really Greece that is at stake, but the banking system of the whole Euro area. By now pretty much any one with some common sense realises that Greece cannot pay back the loans, its a mathematical impossibility. However what is really going on by bailing out Greece is the bailout of German and French banks and the ECB itself.

All these entities are on the hook for an uncalculable sum, because its not just a simple as straightforward lonas, but also involves credit default swaps, you know those pesky things that caused the last crisis. The fact is that it seems noone really has been able to calculate the final cost of a disorderly default and the credit reference agencies continue to claim that any soft restructuring will be seen as a credit event. What this means is that bond holders will be able to claim on their insurance contracts if there is any form of restructuring or default.

The other problem is that it will likely cause a domino effect as banks are forced to finally recognise their loses and then are in trouble because those bad loans means their capital adequacy margins go out of the window. This means they will have to have massive injections of good capital inorder to meet regulations. If they don;t get that capital and it could amount to billions upon billions, they can no longer conduct business and there is a real danger of a further credit crunch. The whole thing is a bit of a circle jerk because they have lent money to each other and as one loan goes bad it ripples thru like one of those domino toppling shows.

The ECB itself bought huge amounts of Greek bonds as the crisis started, because they though that by this action they could keep bond yields down and try and hoodwink the market that everything was under control. That obviously failed and now the ECB is in a corner with no way out. My guess is they are insolvent themselves.

Trichet and others have said that they will not monitise the debt, ie just print up some fresh paper to cover it up, mainly i think because the Germans are frightened of hyperinflation.

So you have a situation where you cannot go on, but you cannot stop either and the time to fold your cards has long gone because of the crazy decisions that have been taken in the past.

My guess is that they are trying to buy some more time to sort out what will happen when Greece defaults and to try and minimise the damage to the EU banking sector. The problem is that time is running out becuase they have to atleast look like they are being serious with Greece ie setting hurdles for Greece to jump over before they get further cash, but the polictical and social situation in Greece is now close to a coup and outright violence, that they canot possibly meet the hurdles, either political or economic.

It maybe that Greece realises that they have the ECB by the proverbial short and curlies, in a sort of "if you owe the bank a grand you are in trouble, if you owe the bank a million, they are in trouble".

Of course we ahve not even talked about the effect of Greece defaulting on the rest of the ailing PIIGS. They too have exposure to Greece and it could be the straw that breaks the back. Also they will be watching with interest to see what happens to Greece, so that they can determine if they want to follow suit.

This is a futher nightmare for the ECB and their precious project that they refuse to see is doomed.

My guess as i have stated some time ago is that most if not all the periphery nations will leave and return to their own currencies. This is what i have been projecting for Spain for a long time and its why the Greek events are key to follow. Contrary to popular opinion Spain is not ok and its banking sector chock a block with bad property loans will be its downfall.

 One of the most lucid and accurate descriptions of the euro crisis i have listened to.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/6/18_MEP_Nigel_Farage.html

 considering this Guy spent 2 Million of Taxpayers money on Expenses.........i wouldn't believe him if he told me it was Monday!!!!!

Although saying that i wouldn't disregard his experience or knowledge on the subject of corruption, albeit Spanish or British!

 Expenses disclosure

In May 2009, The Guardian reported that Farage had said in a speech to the Foreign Press Association that over ten years as a member of the European Parliament he received and spent nearly £2 million of taxpayers' money in expenses and allowances, on top of his £64,000 a year salary.[20]

The former Europe Minister, Denis MacShane, said that this showed that Farage was "happy to line his pockets with gold". Farage called this a "misrepresentation",[21]pointing out that the money had been used to promote UKIP's message, not salary, but he welcomed the focus on the issue of MEP expenses, claiming that "[o]ver a five year term each and every one of Britain's 78 MEPs gets about £1 million. It is used to employ administrative staff, run their offices and to travel back and forth between their home, Brussels and Strasbourg."[22] He also pointed out the money spent on the YES campaign in Ireland by the European Commission was "something around 440 million"[citation needed], making the NO campaign's figure insignificant in comparison.

Hi TJ,

Further back you try and answer some questions on what would happen "when" the Euro collapses saying that most people would be forced to default on their mortgage because of the devaluation of everything. you also say  "If you have earnings in Sterling, then things would be different of course"  What are you saying here?? that we would be better off or worse off because of the exchange rate.

Cheers Rory.

 Hi Rory

What is likely to happen when a country leaves the Euro and reinstates their original currency is that there will be massive currency devaluation relative to more stable curencies and Gold.

In practice what this means is that the cost of imported goods will suddenly appear much much more expensive and this will be of course be in addition to rising prices generaly. For countries in the Med area and the UK that produce very little and subsequently import a lot, this will be very significant.

For example lets say the new currency suddenly buys you half as many dollars, then oil will be twice as expensive and this will tend to feed into inflation in all areas as most things use oil, if only for transport - food does not get to a supermarket by foot generaly.

Altho housing debt may get converted to the new currency as well, the debt amount will be way way out of kilter with new house prices, because the debt incurred was entered into in completely different circumstances but does not change.

If you have income or wealth in another "stronger" currency, then your income may go twice as far in this example. So for instance suppose you rent in Spain, but have a UK income, it might be that your real cost of rent halves.

This is the mechanism by which countries such as Greece will recover. They will quicky become much much more competative relative to now. The cheap holidays and food that i once raved over in the Greek islands so many years ago will likely make a recovery. A Feta salad might once more return for a quid.

For those with local wages and even worse a big Euro mortgage, this will not seem like any kind of consolation.

Belarus recently devalued its currency by 50%, and i thnk it is now well on its way to hyperinflation. 

Hi

You write: For countries in the Med area and the UK that produce very little and subsequently import a lot, this (What is likely to happen when a country leaves the Euro) will be very significant.

I don't understand where the UK comes into this. Admittedly it produces very little, but then it's not in the Euro either.

 Guy

What i was implying was that currency devaluation for countries that produce very little is very different than with countries that are more self sufficient.

For example in Spain the price of tomatoes and a haircut will likely not change in relative terms.

I realise that the UK is not in the Euro in money terms, but i was using it as a example of a country that would be very vulnerable to a currency devaluation.

As it happens the UK has devalued its currency a fair bit already in an attempt to lessen the debt burden and to help its small export sector. However this is a double edged sword as its also now has one of the highest inflation levels of any western nation. The price of tomatoes and most such items in the UK have gone up very considerably as a result of the FX move.

Its a very underhand move by the UK and punishes the savers and prudent at the expense of the feckless. The coming UK public sector strikes are a direct result of this backdoor inflation. It solves nothing,

Since this crisis began which  was caused by the insatiable appetite of people all over the world for improvements in standards of living be that personal or infrastructure, regardless of the fact that it was paid for by debt financing, there has only been one end game which is a bout of rampant inflation to mitigate the debt.

Why else do you think that governments around the world, except those that are not bankrupt such as China, Australia and a few others, have not resorted to raising interest rates to quell inflation.

Add this fact to the comments yesterday by Richard Branson about the real reason behind soaring oil prices, totally down to speculation to which I agree 100%, and the refusal of governements to bring in controls and you have further evidence of the various governments acknowledgement of the need for a bout of serious inflation regardless of their weak protestations to the contrary.

It is only a matter of time.

Barry

Just out of interest, what do you want to happen TJ222 given the option of a crystal ball? Which option would be the least painful for the majority of EU citizens?

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Its a very good question and now we are getting to the heart of the matter. There is plenty of blame to go around, but no one seems to want to own it. The banks encouraged reckless spending on all levels by convincing people that they could have it all now and worry about the paying later. Governments around the globe provided too much cheap money by manipulating rates for too long and pumped up bubbles in consumption, the stockmarket and property. As one bubble burst - the tech market, they pumped up another in the form of housing. Rather than take the hangover they tried to keep the party going. 

As i have written many times in the past, the recession is the solution, the boom was the problem. Despite the banks, no one forced anyone to borrow money to consume or to speculate on shares or property. I have however some sympathy for those who bought a home and were obliged to pay too much, but other forms of debt and consumption were entirely voluntary.

In the case of the Eurozone, i think its pretty obvious now that the project was flawed from the start. Even if you ignore the "looking the other way" that went on as regards the entry qualifications with the Med area countries and down right fraud as in the case of Greece, the pact was always destined for failure imho.

If i lived in Germany, i might chose to sit in a traffic jam in the rain on my way to a stressful well paid job, consoling myself with the luxury smell of the leather in my BMW and the sounds of my Bang & Olufsen stereo. On the other hand if i lived in the Southern Med i might prefer to watch the world go by at the waters edge, happy with a cafe con leche and a good chin wag with my friends. The well paid job probably wasn't going to be an option anyway.

And -------- Who said that the average Med man wanted to work like a Brit or a German anyway? Sure they wanted to live and spend like one, but did anyone really think it was going to last. The differences socially, culturally and in education and climate and just about everything else are so great, it was a union that was never going to work as regards finance. The Bank of England meet each quarter with 12 of the "brightest" minds and carefully steer the economy with 1/4 point rate steps between the twin perils of inflation and deflation ( or so we are told ) and yet everyone expects a bunch of economies as diverse as Greece and Portugal to Germany to manage happily on one rate fits all. Someone's leg is getting pulled!

To find the best solution to the crisis which to be fair is the question - you have to know what is/was the problem. 

The problem is largely decades of living beyound our means courtesy of debt and fractional reserve banking. The Euro project was a huge enabler of this, for a long time it allowed countries like Greece and Spain to borrow at German rates and live like kings. Of course at first it was all good and everyone was happy, now it all is mostly bad and everyone is unhappy.

But I ask you what did people expect? Did people really think that someone else ie Germany was going to foot the bill for pensions and public sector non jobs that the country itself could never afford. Did they think that the bond markets would just go on extending debt for ever with no rational hope of ever getting paid back?

So now there are two solutions, neither of which is going to be any fun. The easy option expired probably 10 years ago.

The first is to try and pay the money back, but in the case of most countries this is not going to be possible. Austerity and tax hikes is inevitably going to cause a negative spiral as in already evident in the UK and near its conclusion in Greece. Even if this was possible it would take perhaps a good decade or more of painful living, not just spending less that earned, but some how finding all the spare to redeem the debt. How many countries can balance their budgets now and they are not even repaying the debt, they are still stuck on interest only. Without the debt based consumption, their economies are going to shrink and the unemployment is going to soar and then take away all the public sector non jobs and the economy is going to fall off a cliff, taking house prices and the banks with it.

That brings us to the second option which is some kind of default. Now you have the option of a soft default or a hard one. The first is the chosen option of the UK and US, but as we have already talked about, inflating away the debt is a double edged sword. If printing money was a good option, then Zimbabwe would now be a world power. Because of this the ECB is not willing to take this route - or atleast thats what they are saying now. Why after all should Germany debauche its currency to rescue nations that have spent and now can;t pay?

The hard default is when you say you can;t or won;t pay. In this case effectively the lender pays because in all cases either the borrower or the lender pays. There is no tooth fairy in the big bad world.

When the lender pays he suffers and then you suffer. He can no longer afford to loan new money and even if he could, you ain't on the invitation list anymore. Then you as a country have to manage on what you earn and no more. in the case of Greece where tax evasion is a way of life, the budget is suddenly very small. Overnight the 5% public sector pay cuts suddenly look like a tremendous option and any kind of pension looks like a fantastic deal. Currency devaluation makes things worse and the standard of living and economy fall off a cliff.

So the end result is the same in both cases, except the soft option takes longer and extends the misery and the final bill as a result of trying to push it under the carpet. The hangover gets postponed by one more last drink.

You choose - up to you. Pain and misery now or more later?